A 3.8% sales tax on real estate in the health care law? This chain email's claim just won't die

Did you get the chain email that claims the health care law will institute a new tax on home sales?

Here’s the email many readers have forwarded to us:

"Under the new health care bill — did you know that all real estate transactions will be subject to a 3.8% Sales Tax? The bulk of these new taxes don’t kick in until 2013 (presumably after Obama’s re-election). You can thank Nancy, Harry and Barack and your local Democrat Congressman for this one. If you sell your $400,000 home, there will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Is this Hope & Change great or what? …

"Oh, you weren’t aware this was in the Obamacare bill? Guess what, you aren’t alone. There are more than a few members of Congress that aren’t aware of it either (result of clandestine midnight voting for huge bills they’ve never read). AND, there are a few other surprises lurking."

The email’s claims are wrong, but that hasn’t stopped people from pressing the forward button. We’ve received copies of this email regularly since 2010. We’ve debunked it before, but since it’s still out there, we’re going to review the facts again now.

The distortion sprouted from Section 1402 of the Health Care and Education Reconciliation Act of 2010, titled "Unearned income Medicare contribution." Legislative wonks might remember that this was the second part of the health care bill, passed via reconciliation so that it only required 50 votes. Democrats had to do it that way after they lost their 60-seat majority due to a special election for the U.S. Senate in Massachusetts.

It is a new tax, but it’s not on real estate transactions. Let us explain.

Right now, workers pay Medicare hospital taxes on wages. Workers and employers split a 2.9 percent tax; the self-employed pay all of it.

The health care law imposes a new 3.8 percent tax on investment income, but it only applies to couples who make more than $250,000 or individuals who make more than $200,000. That investment income could include the profits from real estate transactions.

But it would only apply to those high earners, who make up less than 5 percent of all taxpayers.
The new tax marks the first time investment income will be subject to Medicare taxes, said Clint Stretch, the managing principal for tax policy at Deloitte Tax LLP, when we asked him about in 2010.

We should point out that the government currently taxes investment income in various ways and could have simply raised current rates.

But lawmakers wanted to link the new revenues to health care, Stretch said. "The point of doing it as a Medicare tax was to have the money go to the Medicare trust fund and have it act like a tax that is paying for health care. So there is additional complexity," he said.

We’re not sure why the email extrapolates this tax to all real estate transactions, but that’s the only 3.8 percent tax we could find in the new law. We ran this by two tax policy experts who confirmed our analysis.

If you’re an empty-nester of any means, and you’re thinking of downsizing, part of your profits are already tax-free thanks to long-standing tax exemptions on the profits from home sales.

In general, if you sell your own home, individuals are not taxed on the first $250,000 of profit and married couples are not taxed on the first $500,000 of profit. Again, that’s profit, not the sales price.

If you’re wealthy and sell your home at a substantial profit, it’s possible you might get hit with the new 3.8 percent tax on investment income. Most Americans won’t have to worry about this, though.

The chain email doesn’t acknowledge any of those pesky facts. It says that a 3.8 percent tax applies to all real estate transactions as a sales tax. That is not the case. The email seems intended to scare people, particularly older Americans thinking of downsizing. For that, we award this chain email a Pants on Fire!